Israel has received almost one million immigrants from the former Soviet Union, close to 19% of its established population. The extraordinary exodus of Soviet Jews to Israel in the 1990s is relevant to the current debate about globalisation. This column argues that the wave of immigration was distinctive for its large high-skilled cohort and its quick integration into the domestic labour market. Soviet-Jew immigration raised productivity, underpinned technological prowess, and had a large impact on income inequality and redistribution in Israel’s welfare state.

The primary driver of the Jewish exodus from Russia between 1990 and 1996 was the Soviet Union’s, and subsequently Russia’s, economic collapse, often called 'katastroika'. The demise of the Soviet Union and the exodus that followed is, in macroeconomic jargon, a supply-side shock, and it triggered large migration flows to Israel.

Migrant characteristics

The 1990s Jewish exodus cohort had distinctive professional, social, attitudinal, and behavioural characteristics. Their share in the population was 14.5%. Their average family size (2.32 standard persons) was lower than the national average (2.64), meaning they had fewer dependents. Immigrants came mostly from urban areas, with advanced education systems, so their skill composition was heavily skewed towards high levels of education levels – the average number of schooling years of the new immigrants was 14.0, compared to the national average of 13.3. Among the new immigrants 41.1% of heads of households held bachelor degrees, compared to a national average in Israel of just 29.5%.

The higher education level and the lower family size can presumably explain the income gap between immigrants and the national average. The average labour income per standard person among the new immigrants was NIS 4,351, compared to a national average of only NIS 4,139. This gap existed even though new immigrants had lower work seniority than the established population.

Upward intergenerational mobility and income inequality

The second generation of Jews whose parents had immigrated from the former Soviet Union, experienced higher upward mobility than all other ethnic groups. Although the general association with parents' incomes within the former Soviet Union group is not very different to the population, their mobility relative to the national distribution is high, and the second generation finds its way even to the top percentiles (Aloni 2017),

Figure 1 shows the upward mobility. The figure shows the earnings distribution of children of parents from the bottom decile. Former Soviet Union immigrants experienced a greater upward mobility than the general population, with children's earnings dispersed more evenly across the deciles.

Figure 1 Earning deciles of children born to the bottom-decile parents

Source: Aloni (2017).

Figure 2 shows the probability of outranking parents by five percentiles, as a function of parental rank. Comparing these two groups to the general population suggests increasing polarisation.

Note: Each point represents the proportion to have a children’s rank higher than parents’ by at least five percentiles, binned on parents’ quantile. Population excludes former Soviet Union and Arab population. The difference between former Soviet Union and Arab groups is significant in a 95% significance level throughout.Source: Aloni (2017).

Inequality

Israel’s fast development, facilitated by integration into the world economy and the inflow of high skill immigrants, has come at a cost of growing income inequality, measured by both market-based and redistribution-based Gini coefficients.1

Figure 3 demonstrates that the redistribution Gini coefficient started to rise in 1989, and continued to rise until 2001. This implied that there was more than a decade of falling income redistribution following the Soviet-Jew immigration wave.

Note: * The difference between total and net-income coefficientsSource: Momi Dahan (2017).

Immigrants and the political system

Immigrants may also shift the balance of politics among ethnic groups, economic classes and age groups, or may generate a massive political backlash. In Israel, the political backlash has been moderate, whereas the change in political balance has been larger. Israel’s Law of Return grants returnees immediate citizenship, and consequently voting rights.

To understand better the balance of the political-economic forces at play, one needs to analyse the political-economic forces in a general-equilibrium setup. Razin and Sadka (2017) provide a stylised general equilibrium model with free migration, where wages are endogenous and redistribution policy is determined by (endogenously determined) majority voting.[2]

In the model, the influx of skilled labour raised overall productivity of the labour force. Consequently, it also raised the tax revenue needed to accommodate the pre-existing redistribution policy. This implies more generous redistribution, because it is fiscally less burdensome. Counteracting this pro-distribution force, however, is the rebalancing of the political coalition triggered by the increased share of higher-income skilled voters. The result is that the emerging decisive voter reverses the pre-existing redistribution regime.

A counterexample to Brexit

More than ever, globalisation faces challenging political tests. Brexit may have been the first of many waves of anti-globalisation and rising populism will hit advanced nations. Israel's immigration story, however, provides us with a counterexample.